The UK government and the European Union have entered into a trade agreement to replace the current arrangements ending on New Year’s Eve when the Brexit process is complete.
Britain left the European Union on January 31, but retained EU law during a transition period this year. EU law will no longer apply in the UK from 1 January. The UK voted in a June 2016 referendum to leave the EU, and politicians have spent four tumultuous years negotiating new terms for the country’s relationship with the remaining 27 countries in the EU. bloc, its largest trading partner.
London’s financial markets have flourished over the past four decades as the British capital became the EU’s main hub for lending, trade and investment.
Now outside the EU, there are doubts about the future size and influence of the city’s financial sector. The financial services sector has the largest trade surplus of any industry in the UK, with exports of £ 79 billion in 2019, equivalent to $ 106 billion.
1. Does the deal include financial services?
The agreement continues tariff-free trade for goods and describes how the two economies will deal with issues ranging from security cooperation to fishing rights, but it is not entirely clear how this will affect financial services.
Both sides had agreed during the negotiations to discuss financial services separately. The UK government said in a document published Thursday that the agreement contains provisions to support trade in services, including financial services and legal services.
“This will provide legal assurances for many UK service providers that they will not face trade barriers when selling in the EU and will support the mobility of UK professionals who will continue to do business across the EU,” the document said.
The agreement includes what the UK government described as “groundbreaking provisions” on legal services that allow UK lawyers to advise clients across the EU on UK and international public law, except where EU members have specific restrictions on them.
From 1 January, financial institutions established in the UK will automatically lose access to the EU internal market. In order to serve customers in the EU next year, UK-based institutions will need to have equivalence rights, under which the EU allows them to conduct certain financial activities. Equivalence rights can be withdrawn at short notice. So far, the EU has granted temporary equivalence rights to UK clearing houses, which operate in transactions between buyers and sellers, and pledge to complete the deal even if one of the parties renounces. London has a lot of this financial sanitary, managing trillions of dollars worth of derivatives contracts every day.
The parties will continue to discuss how to proceed with the granting of equivalence and pledge to codify a framework for regulatory cooperation.
A deal between the UK and the European Union came on Thursday, days before the end of year’s end date, giving Britain significant freedom to deviate from EU regulations and sign free trade agreements with other countries. Photo: Paul Grover / Pool
2. What consequences will the deal have for the financial sector?
The agreement will improve relations between politicians and regulators on both sides. This is likely to affect UK-based financial firms that want the EU to take more equivalence decisions to gain access to the internal market. On December 9, the International Swaps and Derivatives Association wrote a letter to the EU urging them to attribute equivalence to derivatives trading venues in the UK. The letter was sent after EU regulators announced rules on Nov. 25 that will prevent London-based derivatives traders at EU banks from continuing their business seamlessly after Brexit is completed.
3. What impact has Brexit had on British financial services so far?
EU regulators want certain things currently being conducted in London to take place in the EU. Banks and fund managers moved £ 1.2 trillion in assets to the EU after the 2016 Brexit vote, and more than 7,500 jobs have left the country in the same period, according to accounting firm Ernst & Young. Since the referendum, 44 companies have announced plans to locally recruit 2,850 existing or newly created positions in the EU, Ernst & Young said. Dublin, Luxembourg, Frankfurt, Paris and Amsterdam are among the main beneficiaries of jobs and assets leaving London.
4. What do people say?
Following Thursday’s announcement of the deal, The Association for Financial Markets in Europe said in a statement that it was important that the EU and the UK now urgently make outstanding equivalence decisions to mitigate the disruption at the end of the transition period.
Bob Wigley, chairman of UK Finance, the industry association for financial services firms, said there is more work to be done.
“It will be important to build on the foundations of this trade agreement by strengthening the arrangements for future trade in financial services,” he said in a statement. “This can be achieved by building on the long regulatory dialogue and supervisory cooperation between the UK and EU authorities and agreeing on all appropriate equivalence provisions as soon as possible.”
Catherine McGuinness, the policy chair of the City of London, the council that manages London’s financial district, said the free trade agreement is positive news.
“We hope it can lay the foundation for a future collaboration,” Ms. McGuinness said in a statement. “We also urge both parties to continue to work on other unresolved issues, including agreeing a framework for regulatory and supervisory cooperation.
Nicolas Mackel, CEO of Luxembourg for Finance, the country’s financial services development agency, said, “We should now see some much-needed goodwill returning to the discussions about financial services. It has never been in anyone’s interest to make access to capital more difficult in the context of the pandemic crisis we are all facing today.
The Bank of England said earlier this month that most of the risks to the UK’s financial stability from Brexit have been “mitigated”, but market volatility and financial services disruption could still occur.
5. What happens next?
Politicians, regulators and bankers on both sides of the English Channel will compete in the coming years to shape European financial markets.
From the UK’s point of view, there are two possible paths: trying to stay fully in line with EU rules in an effort to do more business with the bloc, or taking a more independent path and changing the regulations to get more customers in. to get. worldwide. Many big institutions would prefer to see more alignment, while Brexit supporters prefer divergence.
EU officials are watching the UK closely for signs that their former partner will become too much of a competitor. Robert Ophèle, the chairman of France’s financial regulator, quoted statements by the Governor of the Bank of England, Andrew Bailey and Rishi Sunak, the head of the UK Treasury, this month as evidence that the UK can create regulation to compete with the EU.
“In this competitive context, we also need to build a strong European market and react quickly to how financial markets are evolving,” said Mr Ophèle in a speech on December 2.
The UK still has a lot to lose and the EU to gain. According to New Financial, more than 90% of euro-denominated interest rate derivatives and 84% of foreign exchange in the EU takes place in the UK.
Write to Simon Clark at [email protected]
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